EUR/CHF Scenario Analysis

EUR/CHF Scenario Analysis one day prior to the Swiss National Bank Monetary Policy Assessment.

Originally posted at forexfactory on June 16, 2010

Here are some of my comments on the current situation in EUR/CHF.

Market tripped sizable stops above 1.4000. This cleared the market out of any weak shorts. Price fell back below 1.4000 and you get a daily pin bar form off a price pivot(1.4000) for any of you price action traders. Head and shoulders forms and the market breaks lower below 1.3910 triggering the pattern for any of you chart pattern followers.

There was another event that happened which didn’t appear on the charts. On June 15th there were rumours that the SNB may be willing to allow more CHF strength. Rumors vary and some state that 1.3700 is the level they are willing to tolerate, other rumors put it at 1.3000. Anyways, once the rumors came out this brought in some more macro sellers that were sitting on the sidelines scared of SNB intervention.

The key event risk is the SNB Monetary Policy Assessment on Thursday. The market is expecting them to maintain their expansionary monetary policy. But with the current rumor a certain percent of the market is pricing in that they may change their language on Swiss franc excessive appreciation.

The current language states that “It will act decisively to prevent an excessive appreciation of the Swiss franc against the euro.”

If they leave the statement the same then those market participants that sold eur/chf and usd/chf on the expectation that the SNB may allow more CHF gains may buy back their short trades.

If they change the statement to say something like “It will allow more Swiss France gains, but still intervene from time to time to smooth the market movements.” I am not sure how they could word it but wording it in such a way to show a softening of their position. If that happens then the rest of the market participants that didn’t believe the rumor will now need to reevaluate and potentially short eur/chf and usd/chf, to take into account the fact that SNB intervention will be more limited going forward.

The other risk in the monetary policy assessment is if they change their assessment and indicate that the SNB will begin to remove it’s expansionary monetary policy(aka begin hiking rates). Such a change in wording can be CHF bullish meaning, usd/chf and eur/chf can be under pressure to go down.

SNB was last rumored to be on the bid at 1.3750. Stops have in the meantime have been building below 1.3750, 1.3730 and 1.3700